Certara Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 9, 2023

There are 11 speakers on the call.

Operator

Good afternoon, everyone. Thank you all for participating in today's conference call. On the call from Certara, we have William Fery, Chief Executive Officer and John Gallagher, Chief Financial Officer. Earlier today's chart released financial results for the quarter ended June 30, 2023. A copy of the press release is available on the company's website.

Operator

Before we begin, I would like to remind you that management will make statements during this call that include forward looking statements and actual results may differ materially from those expressed or implied in the forward looking statements. Please refer to Slide 2 and the accompanying materials for additional information, which you can find on the company's Investor Relations website. In their remarks or responses Management may mention some non GAAP financial measures. Reconciliations of these non GAAP financial measures to the most directly comparable GAAP measures are available in the recent earnings press release available on the company's website. For additional information, please refer to the reconciliation tables in the company materials.

Operator

This conference call contains time sensitive information and is accurate only as of the live broadcast date today, August 9, 2023. Certara disclaims any obligation, except as required by law, to update or revise any financial projections or forward looking statements whether because of new information, future events or otherwise. And with that, I will turn the call over to William.

Speaker 1

Thank you, David. Good afternoon, everyone, And thank you for joining Sutara's Q2 2023 earnings call. John and I will start with prepared remarks and then we will take your questions. In the Q2, we delivered software revenue of $33,700,000 growing 17% versus last year And services revenue of $56,700,000 representing 5% growth versus last year. Total company revenue results were $90,500,000 representing 9% growth compared with the Q2 last year.

Speaker 1

2nd quarter software bookings were $35,700,000 and services bookings were $50,200,000 The results this quarter were disappointing and primarily resulted from cautious spending among smaller biotech customers who primarily buy our services as well as a slow recovery in our regulatory business. While we are not satisfied with this quarter's results and they have led us to restate our outlook for 2023 Based on current market dynamics, we believe the fundamental health of the pharmaceutical development market and the increasing acceptance of biosimulation technology provide an excellent opportunity for us to continue to invest in the growth of Certara. During Our software business continued to perform well as we expand our deep relationships with customers and drove new product introductions. Our customer base continues to renew at a high rate with an ARR of 93% and a net retention rate of 112%. On top of the strong renewals, we are generating demand with our newer products, which include SimSit Discovery, Send Explorer and new Pinnacle 21 modules.

Speaker 1

Customer interest in biosimulation software remains strong and during the quarter we passed a milestone of 300 approved drugs with label claims that directly reference CIMSID. During Q1, We acquired Viasa, an artificial intelligence software company, which has given us the opportunity to extend AI capabilities across several of our existing products. We call it Certara dotai. We have rapidly enhanced The development plans for many of our software products with this new AI capability and zatara dotai is already beginning to generate customer traction. The situation during the quarter in our services business was very different.

Speaker 1

Challenges in growing our regulatory business have persisted longer than we anticipated. And during the quarter, we saw an unexpected slowdown in services bookings, primarily from our smaller biotechs clients, But also including a handful of large pharma customers who are reevaluating their portfolios. As biotech companies expanded over the last several years, we successfully supported many of them with biosimulation services, But their funding situation has become much more tight. Although Our services revenue continued to grow during the quarter based on the strength of our backlog. Keep in mind that we are typically actively working on 800 to 1000 services projects in any given month, so we have a broad footprint across the drug development market.

Speaker 1

We have seen recent month over month improvements in services bookings, but we remain cautious in our near term outlook based on these market disruptions. We are not satisfied with our performance in services during the quarter and believe the long term health of the pharma industry An interest in Certara's biosimulation technology indicates that we can do better. Following an internal review of our performance and the current market situation, We are making some changes to help Certara grow to the next level. The first major change is that we are combining our services groups, Including both our regulatory group and our integrated drug development groups into 1 unified services business with 1 management team led by Doctor. Patrick Smith.

Speaker 1

By doing this, we can take advantage of operational synergies and scale benefits of having a single services organization With over 700 people and we can more effectively offer the full array of Certara capabilities to our customers' projects. The second major change we are announcing is that we are creating a single integrated sales force that will combine the several specialized sales groups we currently have in Certara, I have asked Leif Peterson to become the Chief Commercial Officer and all sales resources across Certara, including both software and services We'll report to him. This change will enable Certara to bring the right offering at the right time to the right customers to offer combined software and services projects to become more efficient in our deployment resources and to provide strategic focus on key accounts. Because our confidence in the long term health of our market and the underlying demand for biosimulation remains very high, We are continuing with our investments in new products, which can further benefit this market. The addition of AI technology into our Portfolio has led to a transformation of many of our product plans as we race to incorporate the technology in our existing products.

Speaker 1

The first product that we enhanced was D360, which now has AI models for analysis and prediction of new drug discovery targets. This product is already in the hands of customers who have provided positive feedback. Another early example is our Codex clinical trial outcomes database, which now includes a state of the art AI powered interface for performing meta analysis and comparison on new drugs. We are moving very quickly with generative AI technology and have conducted a full review of our existing product plans to incorporate transformational features and upgrades across Certara's platform. More to come as we launch new versions and upgrades.

Speaker 1

As we proceed to the remainder of the year, our focus is on 3 priorities. We are actively assessing our existing backlog of projects to accelerate projects that were previously delayed and to identify further opportunities to serve those customers. We are uniting our sales force into 1 organization and investing in marketing to increase our new bookings. And We are making important investments in new products that will continue to accelerate the impact of biosimulation as the pharma industry continues to invest in development. Cytara has an excellent position in an important technology that will continue to be adopted by the pharmaceutical industry And an impressive team of people who are committed to invest and grow our company.

Speaker 1

Unpredictable market dynamics have led to some softness this And we have evaluated the situation and are reacting accordingly, but we also continue to see a very bright future with the opportunity to make biosimulation even more important to drug development than it is today. I'm confident in our ability to execute on our revised plan And excited about our long term commitment to expand the use of biosimulation worldwide. With that, I will now turn the call over to John Gallagher to go over our financial results.

Speaker 2

Thank you, William. Hello, everyone. Total revenue for the 3 months ended June 30, 2023 was $90,500,000 representing year over year growth 9% on a reported basis and 10% on a constant currency basis. Software revenue was $33,700,000 in the second which increased 17% over the prior year period on a reported basis and 18% on a constant currency basis. Growth in the quarter was driven by biosimulation software and Pinnacle 21.

Speaker 2

Revenue accounted for 57% of 2nd quarter software revenues. We are pleased with the year to date performance in software, which is growing as expected. Software bookings were $35,700,000 in the 2nd quarter, which increased 17% from the prior year period. Trailing 12 month software booking for $131,300,000 which increased 16% as compared to the prior year. As William mentioned earlier, Certara's total bookings in the quarter were challenged by evolving dynamics surrounding customer spending.

Speaker 2

With that said, software bookings have maintained strength and grown at or ahead of historical levels. The software aggregate renewal rate was 93% in the 2nd quarter, which is in line with our plan. Services revenue was $56,700,000 in the 2nd quarter, which increased 5% versus the prior year period on a reported basis And on a constant currency basis. Services bookings in the 2nd quarter were $50,200,000 which decreased 28% from the prior year period. Trailing 12 month services bookings were $267,500,000 Which decreased 5% as compared to the prior year.

Speaker 2

Our services bookings were significantly impacted by the dynamics William described earlier. In reviewing the underlying drivers of Services performance, we see continued weakness in regulatory as the primary source of our lower full year outlook. We had previously anticipated a low single digit revenue growth outlook, And we are now looking at a decline in the regulatory business. Bookings conversion to revenue has also elongated versus historical trends Customers delayed execution on previously booked projects. Regulatory has been a headwind to our revenue And bookings growth so far in 2023, which we expect to continue for the remainder of the year.

Speaker 2

Outside of regulatory, weak services bookings were seen among Tier 3 customers, which we define as having up $100,000,000 in revenue and includes non revenue generating companies. Bookings acquisition in this year has been more challenging as Our Tier 1 services bookings, which are bookings from those customers with revenue above $5,000,000,000 have not been immune from macroeconomic uncertainty as well and their spend appears conservative and less urgent. Our commercial team remains highly engaged with our customers and our customers remain highly engaged with Certara as well. Total cost of revenue for the Q2 of 2023 was $36,200,000 An increase from $35,200,000 in the Q2 of 2022, primarily due to employee costs related to BioSyn Services billable headcount growth. Total operating expenses for the second Quarter of 'twenty three were $41,200,000 a decrease from $43,400,000 in the Q2 of 'twenty 2.

Speaker 2

The components of operating expenses are as follows. Sales and marketing expenses were $8,100,000 compared to $7,100,000 in the Q2 of 'twenty two. This increase is primarily due to employee costs related to expanding the sales and marketing team. R and D expenses were $7,900,000 compared to $7,700,000 for the Q2 of 2022. R and D expenses were up primarily due to employee related costs for software development.

Speaker 2

G and Expenses were $14,200,000 compared to $17,800,000 for the Q2 of 2022. The decrease was primarily due to lower stock based compensation. Intangible asset amortization was up to 10 point $6,000,000 compared to $10,400,000 in the Q2 of 2022. Depreciation and amortization expense was $400,000 which is flat to prior year. Continuing down the P and L, interest expense was $5,700,000 compared to interest expense of $3,900,000

Speaker 1

for the Q2 of

Speaker 2

2022 due to higher interest expense relating to our floating rate term loan. As a reminder, we have about 78% of our debt fixed at 6.38% and roughly 22% floating at LIBOR plus Read 50. Miscellaneous income was $1,000,000 compared to $2,500,000 for the Q2 of 2022. Income tax expense was $3,700,000 compared to $3,400,000 for the Q2 of 2022. Net income for the Q2 of 'twenty three was $4,700,000 compared to a loss of $600,000 in the Q2 of 2022.

Speaker 2

Reported adjusted EBITDA was $32,400,000 compared to $28,000,000 in the Q2 of 2022, representing 16% growth. Adjusted EBITDA margin was 35.8 reported adjusted net income for the Q2 of 2023 was $18,400,000 compared to $14,600,000 for the Q2 of 2022. Diluted earnings per share for the Q2 was $0.03 as compared to 0 in the Q2 of 2022. Adjusted diluted earnings per share for the Q2 of 2023 was $0.12 compared to $0.09 in the Q2 last year. Now moving to the balance sheet.

Speaker 2

We ended the quarter with $245,200,000 of cash and cash equivalents. As of June 30, 2023, we had $289,100,000 of outstanding borrowings on our term loan And full availability under our revolving credit facility. Turning To guidance for the full year, we are adjusting our 2023 guidance to reflect evolving bookings acquisitions so far this year. We now expect total revenues between $345,000,000 to $360,000,000 representing year over year growth of 3% to 7%. We expect software revenue to grow at the rate of our historical targets.

Speaker 2

Bio simulation services revenue We are committed to maintaining our mid-30s adjusted EBITDA margin performance despite lower expectations for revenue. We now expect adjusted EBITDA in the range of $120,000,000 to $128,000,000 We expect adjusted EPS in the range of $0.44 to $0.48 per share, fully diluted shares in the range of 100 $59,000,000 to $162,000,000 and a tax rate in the range of 25% to 30%. We also wanted to provide some context on our expectations for bookings performance for the remainder of 2023. We now expect 2023 bookings to be down low single digits as compared to 2022. As William highlighted, our conversations with Customers about biosimulation continue at a strong pace and implementing Surcaro's biosimulation remains a priority for customers.

Speaker 2

As we work to execute on a more integrated commercial strategy and focus on pipeline conversion with our customers, We will look to improve our revenue and bookings performance. I will now turn the call back over to William Ferry for closing remarks.

Speaker 1

Thank you, John. To summarize our message today, we are operating in a challenging environment This evolved throughout 2023. We believe this experience to be transitory and are taking a more balanced view of the second half of the year. I'm encouraged by the continued high level of performance from our team and the innovation that is coming out of Certara. We have reasons to be optimistic about the changes we are making in the commercial organization, but timing with such changes is a little tricky to forecast.

Speaker 1

Our medium and long term view on the biosimulation industry and the value of Sitara's end to end products and services to our customers remains as compelling as ever. We're confident that Satara is well positioned for growth and profitability over time as a global leader in biosimulation. We will now open the line for questions. Operator, can you please open the line?

Speaker 3

Thank you. At this time, we will conduct a question and answer session. Your first question comes from David Windley of Jefferies. Please go ahead.

Speaker 4

Hi, good afternoon. Thanks for taking my question. I wanted to first start on kind of the bookings revenue cycle. Could you talk about Your typical cycle time from booking to revenue, just thinking about how should I mean, you're giving us updated guidance admittedly, but how should we think about the lower bookings feathering To revenue over the next maybe 2 or even quarters? Thanks.

Speaker 2

Yes. Hi, David. It's John. As far as so as you mentioned, we've re guided here and the way that we Look at our bookings coming in as we're looking at the pipeline, and then conversion of the pipeline into And then ultimately the bookings conversion into revenue. And what you've seen here Is some slowness in our Tier 3 customers, as you'd expect, and you'd kind of expect that to be the case, given the biotech funding environment that we're in at the moment.

Speaker 2

And so what that's doing is that's slowing both the pipeline well as the bookings conversion to revenue. But compounding that is with our Tier 1 customers, We're seeing some slow, so that's I. E. That's the large pharmas. We're seeing some slowness, not And mind you, not cancellations of projects, but some slowness on the services side, as they've Taking more time, delayed projects, even administrative tasks like Getting a contract to sign have taken longer in this environment.

Speaker 2

And so our updated guidance reflects what we've seen Both in Q2 and what we forecast going forward related to the slowness there. The as it relates What the visibility is and the timing of that then for software and you saw the strength of our software business, Both bookings and revenue growing 17%. We're very pleased with the strength in that business. And that's a key Proof point in the biosimulation adoption and use case as it continues. The visibility for software is good with both SaaS, Ratable revenue.

Speaker 2

In addition to annual renewal licenses, then the visibility is good. As it relates to the services side of the business, Then the cycle time is a bit shorter there, which I think is where your question was going. All that being said, we do have a strong backlog from previous bookings And we're very focused on converting that backlog to revenues in the second half of this year.

Speaker 4

Thanks for that, John. So maybe to Try to pin you down just a little bit more. In thinking about the implied guidance for the second half of the year, Do you expect that to be fairly level 3rd quarter to 4th quarter or third quarter is still a little higher because it is Still living for bookings from last year and then Q4 drops off more, just trying to try to regulate on cadence?

Speaker 2

Yes. So if you look at the second half of the year, then the primary driver for having the second half Decelerate is really the regulatory business, where we've seen weakness there in the bookings in the Tier 3 And on large deals that historically have come in that we haven't seen as many this year. As it relates to the second half and sort of The cadence of it, it's really 2 different stories. On bookings, we expect Q3 bookings here we are, it's August. Q3 bookings, we're expecting to be sort of in line with what we saw at Q2.

Speaker 2

As we look at on The Q4, we are expecting an uptick in Q4 and we've seen that historically. There's we see the software business continuing strength. We see BioSyn Services being able to make some improvements from what we saw in Q2. And then importantly in the REG business, historically, we have seen larger deals come in during Q4. And so for that reason, we see bookings sort of about the same in Q3 and then an uptick in Q4.

Speaker 2

As it relates to revenue, we expect the quarters Of revenue to be similar in the back half of the year.

Speaker 4

Got it. Helpful. Thank you. More On the pricing environment, I'm wondering kind of pricing vis a vis inflation really and wondering out If demand is a little cautious at the moment, if that puts some pressure on passing through normal These increases and then on the flip side from a maybe you're not hiring that much, but from a labor Environment and related to cost environment standpoint, has that settled down to the point where you don't need to push Through as much inflationary price increase?

Speaker 2

Thanks. Yes. On pricing, We are seeking to be competitive here. We do have as it relates to services, we have large deals that we have visibility to in the pipeline. And obviously, we have a very keen focus on converting those to bookings and ultimately to revenue.

Speaker 2

And we seek to be competitive and want to win those deals. So I think that goes to price A bit on that question.

Speaker 4

Okay. I'll leave it at that. Thanks very much.

Speaker 3

Thank you. One moment for our next question. Your next question comes from Luke Sergant of Barclays. Please go ahead.

Speaker 5

Hi, this is Seamus on for Luke. Thanks for the question. So just to start us off, what's your level of communication with Customers and what's kind of giving you that confidence that these are push outs versus lost business to the macro, so to speak? And then How long is that process between speaking to the customer and then eventually Having them come on with a booking. And then lastly, the biotech funding environment has obviously been Talked about for the past few quarters, in fact, some other companies are starting to see green shoots within that customer base.

Speaker 5

I'm just wondering now why this is coming up for you guys and what you're kind of thinking about Why this is coming up now versus a few quarters ago with the rest of the industry?

Speaker 2

Yes, maybe I'll take the last one first. So as far as Why are we seeing Tier 3 pressure? I think the way to think about that is the Tier 3 customer Weakness is not surprising to your point. I mean one way that we look at it is look the funding Some of those biotechs and the pressure they have on them has increased certainly over time. And We generally work with them on later stage drug development projects and therefore it might hit us a little bit later.

Speaker 2

I think more importantly though, I think what's happening is It's the compounding effect of some weakness in Tier 3 compounded by some of the weakness that I talked about in Tier 1. And when you take those two things together, there There's no offset there and that's what's and that's really what you saw in the results at Q2. The conversations with customers, as I mentioned before, our visibility into the pipeline is actually really good for some large transactions in both BioSyn Services As well as in the reg business, but we need to convert those. And What is the time? I think the time varies quite a bit based on whether it's a big or a small contract.

Speaker 2

But I can tell you that sort of the total cycle time for projects and services is shorter than the sales cycle and software. And I'd say, Luke, this is Bill. But it's an

Speaker 1

interesting question about why it hit us later than some Others have reported, but the fact is that based on published data, the Finally, that's gone into non public biotechs, not just early stage ones, but later stage down 20%, 30% year over year. We saw that come through in the behavior of that segment of our customers this quarter.

Speaker 5

Awesome. That's helpful. And then one last one. What is your guide right now contemplating at the low end? Is this a scenario where things kind of worsen or Just any other color around that would be helpful.

Speaker 5

Thanks.

Speaker 2

Yes. The low end of the guide is to your point it is A couple of things would have to happen that worsen and that would be if we saw the regulatory business, as we said in the remarks, we do expect to contract on a year over year basis. But if that business was to decline more And also if BioSim Services saw additional weakness, that would put you at the lower end. So that's the way to think about it.

Speaker 5

Awesome. That's all for me. Thank you.

Speaker 3

Thank you. One moment for our next question. Your next question comes from Vikram Purohit of Morgan Stanley. Please go ahead.

Speaker 6

Hi, good afternoon. Thanks for taking our questions. So we had 2. 1, on the services business, You talked quite a bit about the impact of Tier 3 clients and Tier 1 clients being impacted as well. But any color you can provide on the relative Impact contribution from those 2 client sets and your expectations on How likely each category of clients are to end up either canceling projects or just pushing out projects into 2024 that they would have wanted to do in 2023.

Speaker 6

So that's question 1. And then secondly, just wanted to see if you could talk a bit more about Salesforce consolidation and how you think that might help the business overall kind of on a point of sale basis? Thank you.

Speaker 2

Yes, sure. So on the services side, and how we're looking at that, I mentioned As you said, I mentioned the Tier 3s, which is not totally surprising. I think the Tier 1 space, that's really what was Creeping in and compounding that during Q2. As far as the size of it, Tier 1s are representative of more than half of our revenue. So I guess the way to think about that is A small delay or some small timing can have a larger dollar impact Than what you would expect in Tier 3 because the Tier 3 business just from a sizing perspective, Tier 1s, like I said, are more than 50%.

Speaker 2

Tier 3s are maybe about 30% of the business. And We could aggregate more of those to have a similar impact. As far as timing on projects, The timing we don't see timing flipping into 2024. That's not really the issue here. I think what we're finding is that Deals in the pipeline that we want to get signed and have them become bookings, seeing some delays, even just administrative delays in getting them signed.

Speaker 2

Well, once they are bookings, especially on the services side, turning them into revenue is typically a 1 to 2 quarter kind of exercise. So We are not at this moment suggesting or thinking that project timing is slipping into 2024. Yes. And then, Vic, I'll take

Speaker 1

the second question. This is Bill. You asked about sales force consolidation. So Certara from its Beginning, it is a software and a services company and they are in fact tied together. We believe that we can basically gain both operational synergies and also Price our offer package our offerings better by bringing the sales force together.

Speaker 1

I mean, a lot of cases, Our services involve our software or a lot of our software clients could become services customers. We don't feel like we've fully taken advantage of that in the past. I think there's more to go there. So we think that by bringing this together and having a company wide While sales force will have a better ability to serve those customers and Yes. It's better efficiency in terms of how we treat like, for example, our key accounts.

Speaker 6

Understood. Thanks very much.

Speaker 3

Thank you. One minute for our next question. Our next question comes from Jeff Garro of Stephens Incorporated. Please go ahead.

Speaker 7

Yes. Good afternoon and thanks for taking the question. I want to ask about the work you referenced on analyzing the health of the backlog. You've given several comments on kind of cancellations versus delays, but just curious what assessment that you've come to After looking into that a little bit more and your ability to influence client behavior where you see a clear ROI on projects that are Under contract, but not underway generating revenue yet?

Speaker 2

Yes, Jeff. Yes, as far as the reference to the backlog, Ben, what we've seen with the services piece of the business is, We had put up significant bookings over previous quarters and our conversion of the backlog historically has been Quite good. And so although we see the bookings weakness here and we've spent a lot of time discussing what that looks like, The backlog for BioSim Services in particular more so than regulatory It's large and that's something that's actionable for by us, especially looking at our utilization As something that is going to help us achieve the guidance that we just laid out. So we do the reason why we brought that up is that we wanted to make sure We noted that previous bookings are still something that is something that we're able to work through as an organization. It's something that we're focused on addition to generating the pipeline and the bookings.

Speaker 7

Got it. That helps. And Then another question maybe to dive a little bit deeper on the regulatory business and some of the pressures there. You described regulatory It's kind of a category, but I think there are a few different product lines within that. So the extent that you could distinguish between So the larger projects versus more regular course of business regulatory work and what might be closer to Your biosimulation work versus more generic medical writing as well as the market access piece would be helpful.

Speaker 7

And if you could comment on your ability to compete with CROs for regulatory work in an environment where demand seems to be a little bit softer.

Speaker 2

Yes, Jeff. I mean, it's a competitive space as you know in a large market. And one of the Alliances that we're seeing in that business is historically we have been able to get I'll call it several large deals or bookings done in any given year. By large, we're saying Basically more than $1,000,000 This year, we haven't seen that. Although, as I mentioned earlier, we do have visibility in the pipeline to So that gives us encouragement that we've got to focus, we've got to be competitive.

Speaker 2

And historically, we have turned some of those into bookings in Q4, which historically has been our heaviest Quarter for some of those larger deals in the REG business.

Speaker 1

Yes. I would say also The reason we

Speaker 2

have this business is not to

Speaker 1

be competitive with CROs on medical writing. So we have a High end onshore tech enabled business that appeals to a certain segment. We believe we can price competitively when we need to, but the point of the business has been to go after work that we get because of our biosimilars business. And that is one of the key reasons why we want to combine the sales forces here so that we're taking advantage of all those opportunities to their fullest extent.

Speaker 7

Understood. Thanks again.

Speaker 3

Thank you. Thank you. One moment for our next question please. Your next question comes from Kyle Cruze of Credit Suisse Financial Services. Please go ahead.

Speaker 5

Thank you for taking the questions. Looking specifically at software bookings growth, when you look at the 16% trailing 12 month bookings growth within So operator, it appears that the prior year trailing 12 month bookings would have 1 quarter without Pinnacle 2021 bookings in them as compared to the current year, which would have the full year worth of acquisition Bookings like the full year bookings from that acquisition. Could you please frame the impact of how having one additional quarter of nickel 'twenty one bookings impacts the 8% year over year trailing 12 month bookings growth and maybe provide some broader color on how to look at software bookings growth going forward?

Speaker 2

Yes, thanks for your question. So, yes, we've been very pleased with the strength of the software business. We've talked a lot about service Here for good reason. But as you pointed out, both trailing 12 month bookings for software and then also for the quarter, We grew 16% and 17% respectively. And then revenue grew 17% also.

Speaker 2

So that's really if you look at it, that's The head of our expectations and we're pleased with the strength there. The Pinnacle 21 business, you mentioned that was an acquisition We did back in 2021 and it's continued to perform well. It's been a good transaction and a great business To add to the portfolio and its growth has continued. As far as impact on the growth rate, we annualized Pinnacle 2021. So I think what I'd point you toward is looking at the both the current trailing 12 months As well as the current performance in the quarter on both bookings and revenue as a key indicator on software.

Speaker 2

And as we look forward, I think the last part of your question was how do we think about software going forward. And we expect the strength that we saw in software Continue. And for the remainder of the year and we've got good line of sight there both on a ratable or SaaS type business as well as annual license renewals. And again, we think that's a key indicator That the value proposition around biosimulation remains firmly intact. So despite the fact that we do have some What we would consider to be sort of transitory near term disruptions in the business mainly centered in reg and services, Software is a good indicator that biosimulation as both of products and the services that go with it remain a key item for our customers to look at in lowering the cost And shortening the timeframe for drug development.

Speaker 5

Thank you.

Speaker 3

Thank you. One moment for our next question. Your next question comes from Max Mok of William Blair. Please go ahead.

Speaker 8

Hey, good afternoon. Thanks for taking our questions. Just following up on bookings here in the back half of the year. You mentioned on a Consolidated basis bookings expected to be down low single digits this year. Can you just help us think through what that incorporates from bookings within each segment?

Speaker 8

And then more importantly, I know it may be a little early for next year, but what does bookings being down low single digits this year portend for revenue growth next year? Should we expect Kind of more low single digits or could you actually

Speaker 9

see that maybe step back up

Speaker 8

to the low teens range that you've outlined as kind of the target moving forward? Thank you.

Speaker 2

Yes. Thanks, Max. The way to think about bookings for the second half You do see some deceleration there and that is mainly centered on the regulatory business and the lower bookings that That we're experiencing. So we do think, as I just mentioned, the software business should continue on pace. We would anticipate that BioSim Services, we begin to get some recovery moving it to on the performance moving into Q4.

Speaker 2

And the REG business is where we've got some softness and we're expecting That to continue into the back half. As far as what does that mean for 2024, we're are not able to guide 2024, but the way to think about it is, the strength in the software business is we would anticipate It will continue and that's what we expect for that to continue. I think to get back to a spot Where we'd want to be on higher growth in 2024, we need some help from the biotech funding environment. We need the Tier 3s to return to spending. And then what we mentioned on some of the slowness in R and D spend in the Tier 1s for that to alleviate and then You end up in a higher growth scenario there.

Speaker 2

One thing I'd mention is that we do believe that over the long term, Certara would return to a mid teens grower. And we believe that because of what we're saying earlier on the adoption and the runway for adoption for biosimulation. And so that's certainly not a comment around 2024, but we think that the over the long term Then biosimulation as a process and the products and services associated with it Have the opportunity. The market is there. We are a leader in that market and our ability to grow within that market certainly remains intact.

Speaker 8

Understood. Thank you. Maybe just a quick cleanup one before my final one. On the Split between biosimulation and regulatory, I think in

Speaker 9

the past you said about 70% biosimulation.

Speaker 8

I wonder if there's any update to Just how to think about the mix from the services perspective as well as the mix within each individual segment in terms of software versus services would be really helpful.

Speaker 2

Yes. So we've said that the REG business, well, we said historically it's about 20%, 25% of the business. And actually even in 2023, we still expect it would be in that range. It might be at the lower end of that range. And the mix between software and services, At least in recent history has been 65%, 35% on a revenue achievement basis, services software.

Speaker 2

And that mix will shift a bit based on this current guidance. Think of it in the range of about 200 basis points or so towards software.

Speaker 8

Got it. Okay. And then maybe just a quick one for me. Just anything you can provide around the type of work that's being held up in regulatory? We've heard a lot This quarter about a shift towards later stage trials and it seems like that would actually kind of play into your regulatory business.

Speaker 8

So I guess just anything you could help us or you can provide to help us understand like Why those programs are just not moving forward? I guess I'm just struggling to understand the rationale for a small biotech in particular, maybe hold off on filing for regulatory approval And understanding kind of like the thought process behind that actual decision.

Speaker 2

Yes. I It's a competitive space too. So what we're doing is and we mentioned the pipeline visibility for REG We do see some larger size deals that are in the pipeline and I think what the management team is focused on is Converting those to bookings, but it is a competitive space. And whether it be Small biotechs are some of the larger customers there. We have had a track record of being able to get some of those larger deals in, but we haven't seen that yet in 2023.

Speaker 1

So we're very, very focused

Speaker 2

on the pipeline as we see it right now. So kind of to your point, it's not like the business Yes. Has the business in as a whole slowed? Yes, I think we do think that's the case. But It's not a complete lack of business and I think that's to your point and we're competing for it.

Speaker 8

Great. Thank

Speaker 1

you. Thank

Speaker 3

you. One moment for our next question. Your next question comes Graham Gopartu of Brennenberg Capital Markets. Please go ahead.

Speaker 10

Hey, guys. Just two quick ones How are new additions from larger biopharma software users looking year over year and is software this quarter being driven largely by those Tier 1 customers Expanding software use?

Speaker 2

It's not entirely driven by I mean, Big Pharma It's a piece of it, but not entirely. I'd point you to new logos. So that's a metric that we sometimes talk about in Our new logos on the quarter were 134, which is Sequentially is a good spot. But I think overall, the way to think about it is We're seeing strength in Tier 1 on software for biosimulation. And we see a little bit of slowness in the Tier 3 there, but overall a lot of that business is centered on our top customers as we've said before.

Speaker 10

Got it. And then just one more from me. What software solutions have you seen larger existing customers typically expanding Their software into, are there any in particular that you're seeing trends in?

Speaker 1

Yes. We've seen Expansion in Pinnacle 21 in particular, we're still having very good Uptake in our Phoenix suite as well. And in the core biosimulation SIMSIP, there's also been some additions as well. So It was pretty healthy in kind of the core offerings. Those are the 3 biggest product lines that we have as a company and so we saw expansions in all three of them.

Speaker 10

And on CIM SIV Discovery, have you seen any uptick since it's been relatively recently released or is that Tier 3 weakness kind of impacting that pickup?

Speaker 1

Well, we have seen yes, it's relatively recent. We have seen some nice pickup in that. Probably, it's also been affected by the Tier 3 weakness in the terms of I think We probably would have seen more, but it's hard to estimate that. But it's off to a good start. It Expand the reach of CIMSIP to a different audience, which is important.

Speaker 1

And I think there'll be more to see as there'll be more to come as we go forward in the next couple of quarters. Awesome. Thanks guys.

Speaker 3

Your last question comes from Joe Vruwink of Baird. Please go ahead.

Speaker 9

Great. Thanks for squeezing me in. Just wanted to start on the topic of AI and wondering On the opportunity, not just from an application standpoint, but also the integration of data and different data sources, it would seem like So Tara, just given some of the foundational elements you have would maybe be in a unique position to commercialize A data model and a data offering of what the industry is going to need. I wonder how you think about kind of the product roadmap And what might be first out of the gates as you look to address the AI opportunity?

Speaker 1

Yes. Thanks, Joe. You're right. So like a lot of companies, we've been rapidly assessing what AI can do. But We were fortunate in that we acquired Viasa at exactly the right time.

Speaker 1

We got a good team and we got it in their layered product. We have a very interesting opportunity for data integration exactly like what you're talking about. So just keep in mind, We've owned them for just a few months. And so we've had the opportunity to go through our product portfolio. First step was to look at what can we add in our existing product portfolio and we've in a few months We've added to a couple of

Speaker 7

our products,

Speaker 1

T360 and our Codex database. That's a Good early indication, but certainly not our full ambition or really what we've got in the pipeline. As you look forward though, it's exactly what you talked about. There's an opportunity to look across the vast amounts of data that Not only exists publicly, but that many of our clients have internally in their proprietary databases and integrate them And either train the models or use that in AI products. So we're very much focused on that.

Speaker 1

It's really quite energized our software development team here as we're at the forefront of figuring this out. I think as you go forward, you'll see more and more of that in what we talk about and in our products.

Speaker 9

Okay. That's helpful. And then just a question on kind of the connection Between Biosim Services and Software, and I guess this is more directed at some of the changes you saw in the Tier 1 Customer segment, but is there ever a leading indicator between the two where services Utilization and seeing downward adjustments there is a precursor for changing in software demand Or maybe a different spin on the question, can your software get to a point and obviously you've invested in User interface and making things more user friendly, can it ever get so self serve that maybe the need for Services is ultimately lesser?

Speaker 1

Yes. Great question. But I think that the situation is that software is pretty complex. Obviously, we want to make it Easier to use with better user interfaces like you're talking about so we can expand the number of people. But what we see is that as the software Expands its user base, we actually kick up many more services projects.

Speaker 1

It gets used to answer a lot of Questions, people want to extend the software, they want to change the models. A lot of times it goes back The other way as well in terms of services projects give us good ideas for features that we extend the software. So there's sort of this interesting Ecosystem between the 2, it would be I mean, it would be great for Pharma and we wouldn't say no if our software got so good that we could just eliminate services Altogether, but the reality is that pharma is working on so many drugs with just so much different Complexities in terms of the science that's going into them, but there's always opportunities there to add on services. And I think our clients really value not just We're software providers, but we've got a pretty impressive group of people who have Numerous drug development successful drugs under their belt from before they came to Certara and at Certara, They're seeing hundreds of drug development projects every month. And so that's valuable to our clients as well as they bring our services in.

Speaker 1

So I think what we saw

Speaker 2

in the quarter is,

Speaker 1

I would be more alarmed if the software dropped because that would probably indicate more of a Permanent shift in the amount of money going into pharma development. Services can go up and down a little bit based How funding comes in and how cautious people are in spending and how distracted they are. But as long as we have that software base there, we've got a good opportunity to continue to grow the services group as well.

Speaker 9

Okay. Thank you very much.

Speaker 3

Thank you. I would now like to turn it over to William Furey for closing remarks.

Speaker 1

Thank you very much everybody. So we obviously are not Happy with the performance we've turned into the Q2 on bookings. We still feel With a lot of data that there's plenty more growth ahead for Satara to bring biosimulation to the pharmaceutical industry, We are investing heavily, not slowing down at all because of this in The further development of our software, we're very excited about the potential to incorporate AI in biosimulation and what that's going to do to expand. And we believe that as we come out of the next couple of quarters, this softness in service will reverse itself. So I look forward to talking to you in the next quarter and hopefully giving you a better update in terms of where we stand in terms of bookings.

Speaker 1

Thank you very much and good evening.

Speaker 3

Thank you for your participation in today's conference. This does conclude the program. You may now

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Key Takeaways

  • In Q2 2023, Certara delivered revenue of $90.5 million (up 9% YoY), with software revenue growing 17% to $33.7 million and services revenue rising 5% to $56.7 million, while bookings were $35.7 million for software (+17%) and $50.2 million for services (−28%).
  • The company has revised its 2023 guidance to total revenues of $345–360 million (3%–7% growth), bookings down low single digits, and mid-30s % adjusted EBITDA margin ($120–128 million), with adjusted EPS of $0.44–0.48 per share.
  • Certara’s software business remains robust, featuring a 93% ARR renewal rate, 112% net retention, over 300 approved drugs referencing its biosimulation tools, and the launch of new AI-enhanced products under the Certara.ai umbrella.
  • Services faced near-term headwinds from cautious spending by smaller biotech clients and a slow regulatory market recovery, prompting the integration of its regulatory and drug development groups under a single management team to drive synergies.
  • The company is unifying its sales force under new Chief Commercial Officer Leif Peterson to offer combined software and services solutions, while prioritizing backlog acceleration, marketing investment and ongoing new product development to capitalize on long-term biosimulation adoption.
AI Generated. May Contain Errors.
Earnings Conference Call
Certara Q2 2023
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